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How do Credit Card and Debit Card Chargebacks Differ?

Considering most consumers use debit, credit and prepaid cards interchangeable, you might be surprised to learn there is actually quite a difference between the three cards.

Consumers enjoy certain perks of using debit cards, such as the ability to get cash back on debit card transactions. However, a debit card chargeback can be quite different from a credit card chargeback or even a transaction dispute with a prepaid card, and consumers may not enjoy the details.

Payment Card Differences

Before we can look at the characteristics of a debit card chargeback, it is important to differentiate the fraud protection awarded to the different cardholders.

Credit Card

Debit Card

Prepaid Card

Fraud Protection

Cardholder liability is capped at £50.

If reported within two days, liability is capped at £50. If reported after two days, liability is capped at £500. If reported after 60 days, the cardholder is liable for the entire transaction amount.

Liability is determined at the discretion of the issuer. At best, protection will mimic a debit card.

Refund time frame

Accounts are usually reimbursed immediate or within a few days.

It might take 10 days for the bank to award a refund.

The time limit is also at the discretion of the issuer, but usually is within 10 days.

Credit Cards

When it comes to fraud and chargebacks, credit cards offer the most protection. At most, a cardholder is only liable for £50 of an unauthorised transaction. Some issuers provide zero liability cards, meaning the cardholder will be reimbursed for the full amount of the fraudulent charge.

With credit card transactions, the consumer’s cash reserves aren’t affected. While the available credit for the card may drop temporarily after the fraudulent purchase is made, the cardholder isn’t affected much by the unauthorised purchase. Additionally, once a chargeback has been filed, a refund should be credited to the account immediately.

Debit Cards

Many consumers prefer debit cards because they help keep debt in check; cardholders can’t spend money they don’t have. Unfortunately, this perk comes with a significant risk: reduced fraud protection.

Credit cards have a maximum fraud liability of £50. With debit cards, that liability cap only lasts two days. If consumers don’t immediately report a lost or stolen card that has been compromised, the fraud protection decreases significantly. After two days, the liability jumps to £500. If consumers let two billing cycles pass, they won’t be reimbursed for any of the fraudulent purchases.

Additionally, the effects of fraud are felt immediately. A criminal has the ability to completely drain the consumer’s bank account before the unauthorised purchases are detected. The law allows banks to take 10 days to review the claim before issuing refunds. While some banks refund the cash much sooner, cardholders usually feel the effects of such a limited access to necessary funds.

Prepaid Cards

The popularity of prepaid cards originally took off because consumers were unable to secure traditional checking or credit card accounts. Now, consumers actually prefer prepaid cards to other payment methods.

One study reported 59% of prepaid cardholders had a checking account; 45% had also used a credit card in the past year. It seems the popularity of prepaid cards is flourishing despite the decreased fraud protection.

Since these cards aren’t tied to an account of any kind, they are essentially the equivalent of cash and come with very limited, if any, fraud protection.

There are several different types of prepaid cards, all issued from various financial institutions. Generally, the fraud protection offered to cardholders is at the discretion of the bank. While some issuers will provide roughly the same protection as a debit card, a refund for unauthorised transactions isn’t guaranteed. Additionally, the law doesn’t demand issuers give cardholders the option to file chargebacks based on billing errors or quality issues.

Like debit card users, consumers who use prepaid cards will experience cash flow issues after fraud.

How a Debit Card Chargeback Affects the Merchant

The decreased fraud protection offered to cardholders doesn’t affect the merchant nearly as much as it does the consumer.

There is one good thing about debit card chargebacks though: the cumbersome process coupled with decreased protection means merchants probably experience fewer chargebacks than they normally would if all their customers used credit cards.

Technically, each credit card purchase is a loan from the credit card network. The consumer makes a purchase, but the network pays the merchant. Later, the cardholder reimburses the network by paying the bill for the monthly credit card statement. If a cardholder disputes a transaction through a chargeback, the card network realises it might not be repaid for the loan. Therefore, it is in the network’s best interest to resolve credit card chargebacks quickly. With a debit card chargeback, the bank has less of an incentive to recover the lost funds. After all, the cardholder has lost the money, not the bank.

To file a chargeback, debit card users will probably need to jump through several hoops with the issuing bank. For the consumer, it is probably easier and quicker to request a refund directly from the merchant. This gives the merchant the opportunity to rectify the situation in a way that benefits both parties (the consumer gets a refund and the merchant prevents a spike in the chargeback-to-transaction ratio).

If a consumer is able to persuade the bank to file a debit card chargeback, the amount disputed might be less than the original purchase amount due to the elevated cardholder liability.

When considering the risk of chargeback, debit card holders pose the lowest threat for card-present merchants. A PIN debit purchase is considered one of the safest transaction types. It is highly improbable a card-present merchant will see a debit card chargeback because it will be extremely difficult for the cardholder to prove fraud.

Because of the decreased fraud protection, consumers are regularly warned against using their debit card in situations that are perceived as risky. Merchants with the following characteristics are less likely to see a debit card chargeback since experts advise consumers against using their card in the following situations:

Any card-not-present situation: Consumers are already at a greater risk of fraud when participating in card-not-present transactions (especially mobile commerce). Therefore, using a card with less-than-ideal fraud protection would be irresponsible.

Purchases that require a deposit: Using a debit card means the consumer’s cash is tied up until the deposit is returned.

Restaurants: Because the card leaves the consumer’s sight, the risk of merchant fraud is greater.

Buy now, take delivery later: Chargeback time limits usually begin the moment the purchase is made. This means the deadline might expire before the consumer is aware of any trouble.

Recurring payments: Consumers might not have sufficient funds in their bank account when the transaction is processed because they forget about the upcoming charge.

Travel accommodations: All businesses are susceptible to hackers. If the consumer’s account information is stored by the merchant for several months until the travel arrangements are executed, there is a higher risk of compromised information.

How to Prevent Debit Card Chargebacks

While debit card chargebacks are less likely than credit card chargebacks, it is still important for merchants to take the necessary steps to prevent them from happening.

Customer Service

Because filing a debit card chargeback is usually more challenging than securing a refund from the merchant, it is especially important to provide exceptional customer service.

If a cardholder and bank are butting heads, the consumer may realise it would be easier to get a refund directly from the merchant.

Some simple ways to improve customer service include:

Promptly and adequately addressing all emails, phone calls and social media messages.

Authorisation Amounts

Consumers can be confused by authorisation holds. If the merchant has authorised a charge that is more than the original transaction, the consumer my file a knee-jerk chargeback because of the misunderstanding.

For example, a hotel might place a hold on the debit card for more than the agreed-upon rate to cover potential damages and additional expenses. While a credit card holder might not notice the lowered available credit, a debit card holder is more likely to be affected by less accessible cash.

Communicate openly and honestly with consumers. Make sure the business’s polices are easy to find and understand. Ask the customer to read and agree to the policies before completing the transaction.

Remember that some banks will hold the pre-authorisation funds for one to eight business days. Therefore, it is important to settle batches quickly. Once the charge has been applied to the account and the authorisation hold is removed, the cardholder will again have access to all the available funds in the account.

Get Help Managing Debit Card Chargebacks

While they might not be as common as other forms of transaction disputes, debit card chargebacks do happen. If you’d like help reducing your risk of chargebacks and recouping lost profits, let us know. Contact us today and we’ll tell you how much more you can earn by taking control of chargebacks.

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